End of an Era

Over the past year a long string of news stories has given a
blow–by–blow account of the crumbling power
structures of Wall Street. Countrywide Financial, was forced
to sell itself after building up a portfolio of almost one
and a half trillion dollars in loans. After being badly
damaged by the mortgage crisis, Bear Stearns was bought by
JP Morgan Chase for a bargain basement price. Bank of America
acquired Merrill Lynch in a last ditch effort to avoid filing
bankruptcy. Lehman Brothers was not so fortunate, becoming the
largest bankruptcy in U.S. history.

We’ve also seen the largest destruction of shareholder
value in American history with the collapse of AIG:
$180 billion gone in a matter of days. By comparison,
Enron, the largest failure when it filed for bankruptcy in 2001,
wiped out $60 billion—a mere third of AIG’s loss.
More recently, Washington Mutual accounts for the largest bank
failure in US history. The Wall Street investment bank no longer
exists, as Goldman Sachs and Morgan Stanley have become standard
bank holding corporations, submitting to greater regulatory scrutiny
in an attempt to strengthen their balance sheets with deposits from
traditional banking customers.

While some politicians were making impassioned statements about
slow growth and the weakening manufacturing industry over the
past 5 to 6 years, there were many sectors of the US economy that
were growing like wildfire. Now that the entire system has been
burned, it is clear that much of this growth was fueled by nothing
more than greed and complicated arithmetic. Even those who
criticized the state of the economy failed to take note of the
disaster that was lurking in some of our nation’s most respected
financial institutions.

Government intervention

The situation deteriorated to the point where the Chairman of the
Federal Reserve, Ben Bernanke, and the Secretary of the Treasury,
Henry Paulson, pleaded with Congress to enact legislation allowing
the US Government to spend hundreds of billions of dollars on buying
depressed assets from struggling financial corporations.

What is a depressed asset? An asset is anything that has some
economic value and can generally be bought, sold or traded for
some other asset—cash, a house, a car, a share of
stock, or in the case of these banks, collateralized debt
obligations and mortgage–backed securities. In a
market–based economy, the value of any asset at a point
in time is the amount that a buyer is willing to pay for it.
An asset becomes depressed when its value drops below the
inherent worth of the asset or below a level where the owner
can sell it without incurring massive financial harm.

The meltdown in the housing market and a growing foreclosure rate
have created a giant crisis of confidence in any asset backed by
mortgages or real estate, and as a result they have plummeted in
value. Banks, investment houses and insurance companies rely on
the value of their assets to guarantee that they can raise capital
and obtain the credit they need to continue to function. When those
assets are depressed, a bank cannot sell enough of them at a price
that allows them to continue operating. The flow of cash and liquidity
slows to a crawl and the bank’s customers may be unable to
make withdrawals or access their funds.

With the ownership of these depressed assets spread throughout
the financial system, the liquidity slowdown can cause a complete
gridlock that will affect not only Wall Street firms, but banks,
businesses and families throughout the country and even around the
world. This is similar to the financial crisis that affected the
Japanese economy for almost 14 years from 1991 to 2004. In that
situation, the crisis also started with a real estate bubble
bursting that created a ripple effect through the financial system
and a massive increase in bad debt. After the situation reached
an apex, it took years and several rounds of massive government
intervention to resolve the crisis and restore stability to the
economy. Bernanke and Paulson have described their proposal as an
attempt to apply a comprehensive recovery effort early and avoid
a similarly prolonged economic stagnation. Even still, they are
unsure if it will be successful, or too little, too late.

A tarnished global reputation

Whatever the outcome of the government’s plan, the run–up
to the current events and the staggering mistakes of America’s
revered financial giants has left the rest of the world shaking
their head in disbelief and searching for opportunities to increase
the prominence of their individual economies. These countries feel
that the United States has long had an economic superiority complex
and run roughshod over other nations. Now, what was the crown jewel
of free market economies is in turmoil after a series of missteps.
Other developed nations are frantically taking their own measures to
try to limit the global repercussions. And some are seizing the moment
to try to claim a more prominent and powerful position on the world
stage.

On September 25th, the German Minister of Finance, Peer Steinbrueck,
spoke to Germany’s lower house of Parliament. He told them,
“One thing seems very likely to me. The United States will lose its
superpower status in the world financial system. The world financial
system will become more multi–polar.” He also criticized
the “Anglo–saxon capitalist drive towards large profits and
massive bonuses for bankers.” Steinbrueck later discussed the
role of the dollar as the world premiere reserve currency, saying
that in the future, it would just be one of several major currencies
alongside the Euro, the Yen and the Yuan.

French President Nicolas Sarkozy has also discussed the need for an
overhaul of American–style capitalism. Sarkozy called for world
leaders to meet together and create a plan to overhaul the global
financial system. “It is the duty of the heads of state and
government of the countries most directly concerned to meet before
the end of the year to examine together lessons of the most serious
financial crisis the world has experienced since that of the 1930s.”

Worldwide disdain

Bloomberg reports that countries like Brazil, Venezuela, Bolivia, and
Argentina, who have often felt the weight of America’s economic
influence, are also taking the opportunity to lash out at the United
States. The report quotes Cristina Fernandez de Kirchner, President
of Argentina, as saying “No one can talk about the ‘caipirinha
crisis’ or the ‘tequila crisis’ or the ‘rice crisis’
or whatever name that always denoted the crisis was coming from
emerging markets. We should perhaps call it the ‘jazz crisis,’
where the effects emanate from the center of the biggest economy.”

Even if the United States is able to stabilize the financial system
and secure the flow of liquidity, a full recovery may be slow arriving.
Doubts about the resiliency of the American economy have continued to
spread and grow, and some analysts fear that many individuals and
corporations will cut spending and investments to a level that could
halt growth or even cause a contraction. A crisis of this magnitude
has created a sense of panic in many investors that will be hard to
overcome.

This financial crisis has undermined and embarrassed the US financial
empire, revealing the faulty principles on which it has been built.
The implications will continue to ripple around the world for years
to come as the sun sets on American economic supremacy.

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